What is the Best Way to Pay off Your Student Loans
Something I’ve been thinking about recently is what EXACTLY is the best way to pay off student loans. I heard while listening to a popular Financial Pundit’s radio program where a Dentist called in. It was the wife of a Dentist and she said the following:
- My husband went to dental school and has $300,000 of student loan debt. We are trying to decide if we should open a practice first or buy a house then open a practice.
- The radio guy just starts ripping into the poor girl. Basically, calling her husband an idiot for having so much debt.
- His advice: you need to 1st save $1,000 and then y’all are living on beans and rice until you throw every dollar you make to get rid of this debt. You must be crazy to think you’re going to take on another $500,000 in debt to open a practice.
It’s quite sad when you hear this kind of advice. I won’t even get into the fact of how thoughtless this advice is to only recommend $1,000 in savings – what if you have a medical bill, car problem, emergency, etc., etc. that costs more than $1,000? You hear this all the time “Just keep living like a student and throw everything you make at your student loans until you pay them off.” This is easy to say, but very difficult to do in practice. Especially if you took the path of becoming a Doctor.
Delayed gratification is a real thing that people struggle with. While you are in Medical or Dental school, you must suffer through scrolling down Social Media and seeing all your friends who entered the workforce after undergrad and are living it up. Meanwhile, you’re stuck being broke; burning the midnight oil studying your butt off.
And what do you get in return? 6 figures of student loan debt at 7% interest in some cases. I can understand the motivation to pay this off quickly because you’ve seen how the interest has compounded over the years.
But let’s go down that path of after you finish training and you’re now making 6 figures that you still have the discipline to live like a pauper and throw everything at your student loans.
- You’re missing the other side of the equation
- Your net worth is not only dictated by the amount of debt you carry
- Your net worth is your Assets minus your debts
- Let’s say you ignore building your assets for 5 years and just throw every dollar you make at your student loans
- But then you remember, aren’t you now behind on building up a Retirement nest egg? Now, that $5,000/month student loan payment that you don’t have to make isn’t just money that you get to spend. It’s money that you MUST save, because you are so far behind on Retirement
- You see the cost of time is the most expensive thing you have in investing
- Is it worth being miserable for another 5 years of your life? I’m not saying don’t pay the dang thing off, but can’t you find some type of balance?
- What is the cost of waiting onyour retirement?
- If you save $1,000/month from age 30 – 60 ($360,000 total), earning 8% interest, you will have $1.5million saved up at age 60
- If you wait 10 years to start saving $1,000/month, from 40-60 ($240,000 total), you will only have $590,000 saved up at age 60.
- Think about that. The difference in the amount that you saved is $120,000 in those two examples. Because you waited for just 10 years, the difference in your net worth is $910,000.
This hypothetical example is for illustrative purposes only. Not based on any particular investment. Assumes 8% annual return. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.
But what about the flip side of the argument? Isn’t my interest on my student loans piling up if wait to pay it off? Yes, that is also true. You see, two things can be true at once: Saving for retirement and taking longer to pay off loans cost you in interest on your student loans. Not saving for retirement and paying off your loans quicker, cost you in time/compound interest for retirement.
Here’s the point I’m trying to make. In life, there should be balance. Same with finances. I’m not saying take 30 years to pay off your student loans but don’t burn yourself out either trying to pay them off quickly to the detriment of saving for your retirement, your kids’ college, or living on beans and rice and not taking a vacation to enjoy yourself. Life is too short for that.
The question is, what is the end goal? The end goal is Financial Independence. And what does that mean? Being debt free? No, it means that you have more money coming in passively from your investments than what you are spending. Does it matter at that point if you still have student loans or any other type of debt?
Why are we so adamant about student loans? I hear it all the time, I just hate having that student loan debt. You rarely hear anyone say, “I need to live like I’m broke because I just bought a $500,000 house and I need to pay it off ASAP!” Sounds kind of silly right?
One of my clients could retire in his early 40s if he really wanted to but guess what, he still has student loan debt. What the studio audience doesn’t know is he started saving and investing his money immediately upon completing his training school. Now, he could live off these passive investments as the interest coming in from them is more than what he spends.
So, what EXACTLY is the best way to pay off your loans? I don’t think there’s a right answer. I know Doctors who have paid their loans off very quickly and are doing just fine financially. I’ve seen it work both ways. But don’t let me or anyone else tell you HERE IS THE BEST WAY TO DO IT, because most of the time they are telling you this is HOW I DID IT, so YOU SHOULD DO IT THIS WAY.
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